Airlines have historically earned significant revenue premiums on the popular New York-San Francisco and New York-Los Angeles routes. Both of these long-distance routes are popular with business travelers who are willing to pay more for extra comfort during the long flights.
Five airlines serve both routes nonstop: AMR's (NASDAQOTH:AAMRQ) American Airlines, Delta Air Lines (NYSE:DAL), JetBlue (NASDAQ:JBLU), United Continental (NYSE:UAL), and Virgin America. Crucially, the country's three large network carriers compete on both of these routes.
The historical profitability of these routes has recently led to increased competition among all five players as they try to attract more customers. Premium passengers have more options today than they previously enjoyed. As I discussed earlier this week, JetBlue is making a major push to gain a foothold with business travelers in these two markets. That effort may lead to lower business-class and first-class fares, particularly since many corporations are trying to cut back on travel costs.
The carriers with the largest market shares on these routes are at risk if price competition drives down their margins on these flights. That said, the incumbents aren't standing still. American, Delta, and United are all in the midst of improving their transcontinental products to keep their customers happy. The airlines that do the best job of maintaining or gaining share on these lucrative transcontinental routes will have a big edge over their competitors.
New kids on the block
JetBlue and Virgin America -- two of the younger airlines in the U.S. -- try to differentiate themselves based on service. As a result, it's not surprising that they have both entered the key New York-San Francisco and New York-Los Angeles markets. As I noted in my recent article, JetBlue is adding its first ever premium cabin next year to better serve business travelers on these two routes.
Virgin America already offers an eight-seat first class cabin on all of its flights. Virgin America's first class seats have a 55-inch pitch, which provides plenty of recline and legroom; however, the seats don't go fully flat. Virgin America also offers a higher standard of service than most U.S. airlines today and received the top spot in the 2013 Airline Quality Rating survey.
San Francisco-JFK and Los Angeles-JFK were two of Virgin America's initial routes when it began service in 2007. After achieving strong results on those routes -- and picking up slots at Newark Airport as part of American's bankruptcy restructuring -- Virgin America launched complementary service from San Francisco and Los Angeles to Newark this spring. CEO David Cush has said that the new flights are already profitable and that Newark fare levels are comparable to JFK fares.
Virgin America's entry to the Newark market will put significant pressure on United Airlines, which previously had a monopoly on the Newark-San Francisco route and a near-monopoly on the Newark-Los Angeles route. United only operates its "P.S.," or "Premium Service," planes on transcontinental routes from JFK. However, that means Virgin America fliers are probably getting a better experience on transcontinental flights to Newark today.
Legacy carriers strike back
The legacy carriers that dominate the transcontinental market -- American, Delta, and United -- aren't about to let JetBlue and Virgin America eat their lunch. All three are going forward with major upgrades to their transcontinental flights to maintain or gain market share.
Earlier this year, United began reconfiguring its transcontinental Boeing (NYSE: BA) 757s to offer full flat-bed seats in business class. The first aircraft in the new configuration began flying between New York and L.A. in March, and United hopes to complete the airplane renovations by the end of the year. (As of mid-June, United had retrofitted four of 15 airplanes, with four more in progress.) United will also have Wi-Fi service available on all transcontinental flights by year-end, as well as a selection of complementary video-on-demand selections.
Looking to keep pace with United, Delta has also begun upgrading its service from JFK to Los Angeles and San Francisco, as well as Seattle, with a new full flat-bed business class product. Delta's first refurbished Boeing 767 began flying between JFK and Los Angeles in March, and the three routes will be served by a dedicated fleet of 757s and 767s offering full flat-bed seats in business class by early 2015. Delta also recently introduced an enhanced food and entertainment offering for these transcontinental flights.
American has announced perhaps the most ambitious transcontinental revamp among the three legacy carriers. The carrier is taking delivery of new Airbus A321 aircraft beginning later this year. Some of these planes will have a special three-class transcontinental configuration. There will be 10 first class seats in a 1x1 configuration, followed by 20 business class seats in a 2x2 formation. Both premium classes will feature full flat-bed seats, and the new aircraft will also include a number of technology and entertainment perks.
Let the battle begin
Deep-pocketed business class customers are the main focus of the brewing transcontinental airline war. The new premium cabins United, Delta, American, and JetBlue are introducing are all designed to appeal to customers who want plenty of personal space for daytime flights and a full flat bed for overnight flights.
However, it remains to be seen whether there is enough demand for high-priced premium tickets to keep fares up and maintain the historically high margins of transcontinental flights. JetBlue has already stated that it plans to offer lower price points to woo potential customers, and this could lead to a first/business class fare war next year.
Airlines are investing heavily in their transcontinental products because of the significant opportunity in this market; however, that opportunity comes with substantial risks. I am most excited about the opportunity for JetBlue, because it has nothing to lose -- it doesn't have a premium cabin today -- and plenty to gain. A boost in unit revenue from transcontinental flights could lead to healthy margin expansion at JetBlue over the next two to three years.
Adam Levine-Weinberg is short shares of United Continental Holdings and is long September 2013 $33 puts on United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.